One of the topics that draws considerable interest in our Amsterdam, acquisition finance course is mitigating deal risk in acquisitions. In shortened version, here are some of the major risks involved in acquisitions. We outline some of the major problems today. Next Thursday we'll discuss some simple ways to handle these problems.
1. The
deal takes too long to settle (increasing the risk of material changes). The longer it takes to work through a deal the less likely it will be completed.
2. The cash flows don’t play out as expected. We acquire firms assuming a set of cash flows for the future. In many cases these cash flows don't play out. It is also common for the seller to have more optimistic expectations about the future than the buyer. It is necessary to bridge the gap between these expectations to complete the deal.
3. One party abandons the transaction. This is particularly problematic. For sellers, it can mean a lost opportunity to cash out. For bidders, it can mean the loss of time, money and opportunity spent courting a target firm
4. Another bidder acquires the firm. Similar to the above, this can be problematic for bidders not only because of lost time, money and opportunity but because a rival bidder (likely a competitor) has won and is now stronger.
5. The stock price of one of the parties changes before closing. Particularly problematic in stock deals. You think you have a deal arranged but at the time of closing find that the share exchange ratio you agreed upon now produces less than optimal terms. For example, a one for one deal looked fine when the bidder''s stock price was $40, but doesn't look so good at closing when that price has dropped to $30.
Fortunately, there are excellent ways to mitigate these risks. We'll provide some solutions in next Thursday's post.
All the best,
Ralph
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